OCBC expects a December Federal Reserve rate increase to give the U.S. dollar some support, while warning that inflation readings will determine whether that strength can last.
In its Oct. 29 outlook, OCBC strategists Sim Moh Siong and Christopher Wong forecast a 25-basis-point move in December, which would be the second and final increase in their rate outlook. The bank characterized the prospect of tighter U.S. policy as a limited tailwind for the currency; in its view, a durable rise would require fresh evidence of stronger underlying price pressure.
The Federal Open Market Committee held its target range at 3.75% to 4.00% on Oct. 28, in a 10-2 vote. Lisa D. Cook and Beth M. Hammack preferred a 0.25-percentage-point hike. The Fed had last raised rates by that amount on Sept. 16, and its statement described economic activity as expanding at a strong pace while inflation remained elevated.
The U.S. Bureau of Economic Analysis reported that the personal consumption expenditures price index rose 3.6% over the year through September and 0.5% from August. Excluding food and energy, the measure increased 3.1% year over year and 0.3% month over month. The core reading remained above the Fed’s 2% inflation goal.
Federal Reserve Chair Kevin Warsh said the committee would assess new information before deciding on its next move. “I also don't believe in prejudging meetings. A lot of things can happen,” Warsh said.
The European Central Bank kept its three key rates unchanged on Oct. 29: 2.50% for the deposit facility, 2.65% for main refinancing operations and 2.90% for the marginal lending facility. It said higher energy prices posed upside risks to inflation and downside risks to growth. OCBC also identified French borrowing costs and energy prices as potential pressure on the euro, while saying firmer currency management in China and Japan could constrain broad dollar gains.
The next U.S. personal income and outlays report, covering October, is due Nov. 25 at 8:30 a.m. EST. The Fed’s next scheduled meeting is Dec. 8-9.
